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Euro gains in spite of Spain’s bailout

Here is my latest update of the euro exchange rate, covering the 8th to 15th June 1012. This is intended as a brief guide to what’s affected the exchange rate this past week, to help you decide if now’s the best time for you to change currencies.

Exchange rates:

GBPEUR: 1.2264 (-1.54%)
USDEUR 0.7973 (-1.36%)

You can’t have missed it, but the big news this week was Spain’s acceptance of a €100bn bailout for its banks from the EU, and the ensuing doubt about whether this would be enough to solve Spain’s problems. But in spite of there being every chance that the crisis will continue, the euro gained against both the pound and US dollar this week, as crisis fatigue set in.

Why has the bailout not ended the crisis?

Ostensibly, it’s because the markets cottoned on that the rescue was in fact a loan to Spain, and therefore adds some 10.0% to Spain’s public debt. This supposedly makes lending to Spain even less safe. But in fact, Spain’s public debt still hangs at about 70.0%, which is low compared to the UK, Japan and the US, which have so far survived the crisis untouched. So really, Spain is just the victim of a crisis that’s not about Spain, but about relationships in the Eurozone.

What do you mean Eurozone relationships?

The reason the UK and Japan et al. are not under pressure is because they have independent central banks that can support their economies through thick and thin. Because Spain is in the Eurozone, it can’t do that, meaning support for Spain’s economy must come from elsewhere, such as the European Central Bank or other European countries.

To the extent that hasn’t happened, because Germans and Finns etc. don’t want to pay for Spanish debt, this reveals a weakness in the Eurozone structure. This is what has the markets spooked because, although Spain is technically solvent, the Eurozone has not shown it’s willing to support its members in a way these countries would do themselves, if they were independent.

So what happens next for Spain?

Well, the markets will just keep attacking and attacking, either until the Eurozone breaks up, or until member countries demonstrate they’re willing to stand behind each other. Spain still looks set to be the epicentre to that because, as has often been pointed out, it’s too big to fail. To rescue Spain would force Eurozone countries into a tighter relationship, or reject the euro completely.

And what’s going to happen to the euro?

The recent rise in the euro against the pound and USD does not reflect increased confidence in the Eurozone, but crisis fatigue as it were. If the crisis once again escalates, I would expect the euro to decline in short time.

Get in touch

I will of course return with my next update next week. If you have any questions about changing currencies or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.